Fed Expected to Raise Interest Rates: How This Impacts You

This week, the Federal Open Market Committee (FOMC) is meeting to discuss the state of the economy, and decide whether or not to raise interest rates. Although the affairs of the Federal Reserve might come across as complex and perhaps even detached from the financial realities of the average American, the consequences of the Fed’s policies are anything but. Below, we go over the ramifications of this week’s potential decision, as well as what you might be able to expect from the Fed for the remainder of the year.

Will the Fed raise interest rates?

The big question at every FOMC meeting is if the Fed will raise interest rates and why. With the FMOC convening on Wednesday, Nov. 1 and Thursday, Nov. 2, predictions are already coming in and things are expected to play out the way many analysts anticipated earlier this year. Despite some less-than-stellar job market growth in May, an increase in interest rates is being seen as the most likely outcome of Wednesday’s meeting. The Fed itself projected three interest rate increases for 2017, and it seems to be on track for meeting that expectation, despite some very modest but growing political and economic uncertainty.

Why should I care about another rate increase?

If the Fed raises rates this week, it’ll mark the third quarter-percent increase in interest rates in the past six months. Given how fairly consistent the Fed has been about raising rates, it’s possible that by now, those of us who aren’t investors have started tuning out any news relating to the Federal Reserve. It’s important to note, however, that since the Fed reacts to economic data as it comes in, none of its decisions should be considered forgone conclusions.

Borrowers will feel the impact immediately

Every interest rate increase, no matter how small, has immediate ramifications for many borrowers. For example, because credit cards tend to operate with variable interest rates, they are almost instantly influenced by the Fed’s actions. The same goes for other types of credit lending like credit lines. Longer-term lending like mortgages and any loans you have with fixed rates are not directly impacted by the Fed’s policy. That said, if you’re in the market for these types of loans, it doesn’t hurt to pay attention to the Fed’s thinking to understand the general direction that lending markets might be eventually heading, as it might result in a higher or lower interest bill for you.

Savers won’t feel it as quickly — or at all

Unfortunately, while lenders see the immediate benefits of most interest rate increases, savers are often left high and dry, at least for some time. This is especially true for big banks, where annual percentage yields on saving accounts and Certificate of Deposits (CDs) tend to retain the same rock-bottom lows they’ve had for years or if they do increase, it takes them some time to reflect the current offerings. The good news is that online banks and online savings accounts are usually quick to reflect changes in the interest rate; however, given the Fed’s modest and incremental interest rate increases and some degree of economic uncertainty, savers won’t receive mind-blowing gains.

The Fed’s decision reflects the health of the overall economy

The final reason why we, as consumers, should be aware of what the Fed is planning is because the Fed’s decision both relates to and impacts the health of the overall economy. A decision to raise rates in the face of tepid job growth means that the Fed believes the economy is, for the most part, fairly healthy. This means that, all things considered, it’s a decent time to be looking for work or to buy things. A vote of confidence in the economy from the Fed can, in turn, positively impact various financial markets. While a 0.25% hike is a sign of a more cautious form of optimism about the economy’s health, it still is, nonetheless, a sign of optimism.

Will the Fed raise interest rates later this year?

The million-dollar question is whether or not interest rates will increase again this year. The short answer is that we don’t know. Some are already calling a September increase unlikely unless the economy changes, while a December increase is far from off the table – especially since the Fed likely wants to be able to manage market expectations by sticking to its word and pursuing the three rate hikes it said it would complete this year.

Why does a second increase matter? Well, assuming an increase this week and at least one more increase later this year, the federal funds rate (the rate the Fed uses to influence interest rates in the broader economy) will be at 1.50%, up from 0.75% in December 2016. While that might not seem like a lot, that’s nearly a whole percentage point increase from last year. Although the federal funds rate isn’t perfectly correlated with the interest rates in the economy, the relationship is pretty close, with some sources estimating that certain rates, like the prime rate, sit around 3% above the federal funds rate. The prime rate reflects, on average, the interest rates that the largest banks charge their wealthiest and most creditworthy clients. Rates like the variable annual percentage rate associated with credit cards often take the prime rate – the best rate a bank can offer – and add some additional percentage points to account for things like the risks associated with credit lending. In theory, a federal funds rate of just 2% could result in a 10% interest rate (or higher) for certain customers, which is why even the several quarter-percentage increases we’ve witnessed over the past half-year are worth watching.

What should I do?

One or several interest rate increases means that somewhere out there you might be able to get a slightly better deal on your savings account annual percentage yield. You should start looking at some online savings accounts before additional interest rate increases occur so that you can benefit from a decent APY sooner, rather than later. You might want to hold off on putting money into a CD, however, as your money will be locked in at a lower interest rate should the rates increase again.

In regards to borrowing, you should continue to keep your debt, especially debt with variable interest rates, fairly low. Those with credit card debt, who are paying variable interest, should consider completing a balance transfer to rid themselves of paying interest on their current balance. Our reviews of the best balance transfer credit cards can help you connect with the right card for your needs.

Finally, don’t let the increased rates dissuade you from borrowing if you’re truly ready to buy a home, a car or go to school, but just keep in mind that unless your interest rates are fixed, you could end up paying more in the long run — assuming rates continue to increase. By the same token, don’t rush out to take on debt now simply because you see steeper interest rates on the horizon. If you’re not ready to take on debt, don’t go out of your way to do so, as this is bad financial planning.

Following financial news can be confusing and exhausting. If you’re looking for detailed, common-sense explanations of news and information impacting your money, keep reading our personal finance blog, where we discuss the stories and details that are relevant to your finances.

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About Author

Michael Osakwe

Michael Osakwe is a NextAdvisor.com writer covering technology and a multitude of personal finance topics. His research has been featured in interviews with publications like Forbes, U.S. News & World Report, The International Business Times, and several others, He is a graduate of the University of California, Berkeley with a BA in Political Economy and a minor in Public Policy. You can follow him on Twitter @Michael_Advsr.

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